Bernanke Warns China on Yuan, Asks Congress for More Stimulus

Federal Reserve Chairman Ben Bernanke hit back at critics, both at home and abroad, who have challenged the central bank's $600 billion bond-purchase program.

In a speech in Germany, he argued that Congress must help support the Fed's program with further stimulus aid. And he issued a stern warning to China, saying it and other emerging nations are putting the global economy at risk by keeping their currencies artificially low.

Bernanke made the remarks Friday at a banking conference in Frankfurt.

Without more stimulus, high unemployment could persist for years, he said. But in making that argument, Bernanke risks heightening complaints that he's plunging the Fed into partisan politics.

The Fed's Treasury bond-buying program is intended to invigorate the economy in part by lowering interest rates, lifting stock prices and encouraging more spending. Lower interest rates on loans would prompt companies to borrow and expand.

And higher stock prices would boost the wealth and confidence of individuals and businesses, Bernanke has suggested. The additional spending would lift incomes, profits and growth.

But the Fed's program has triggered a barrage of criticism both within the United States and abroad.

Republican leaders in Congress and some Fed officials are among those who say they doubt the program will help the economy. They also worry it could unleash inflation and lead to speculative buying on Wall Street.

And at a summit of world leaders in South Korea last week, China, Germany, Brazil and other countries complained that the Fed's plan would give U.S. exporters a competitive price edge by flooding world markets with dollars. A weaker dollar makes U.S. goods more attractive to foreign buyers.

Emerging economies like Thailand and Indonesia also fear that falling Treasury yields will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.

Still, European Central Bank President Jean-Claude Trichet insisted during a panel discussion after Bernanke's speech that he and the Fed chairman "strongly share the view that a solid strong dollar ... is very important."

The International Monetary Fund's head, Dominique Strauss-Kahn, said he believes that "wherever it's possible ... the support to growth is still something which is absolutely necessary."

He cited the U.S. as an example, saying the economy could pick up to 4 percent growth or slow to less than 2 percent growth, "and the consequences for the rest of the world would be huge." Still, he also said that in general there's a need to "restore confidence" by tackling debt problems.

Because countries are recovering from the severe global recession at different speeds, tensions among nations have risen, making it harder to find global solutions to global problems, Bernanke said. So-called emerging countries like China, Brazil and India are growing at much faster rates than "advanced" economies like the United States, Japan and Britain.

"Insufficiently supportive policies" in the United States and other advanced economies could "undermine the recovery not only in those economies but for the world as a whole," Bernanke warned.

By contrast, China and other emerging economies face the challenge of keeping growth robust, without igniting inflation, he said. By keeping their currencies artificially weak, China and other emerging economies are causing problems for themselves and for the stability of the world economy, Bernanke said.

His comments come days after a U.S. congressional report called on Washington to do more to force China to increase the value of its currency. On Friday, the Chinese Foreign Ministry countered that that constitutes interference in Beijing's internal affairs and accused the U.S.-China Economic and Security Review Commission of having a "Cold War mentality" and of harboring a grudge against China.

Bernanke argued that the Fed's Treasury bond purchases are needed to promote faster job creation and reduce the risk that very low inflation could turn into deflation. Deflation is a prolonged and destabilizing drop in prices of goods and services, wages and the values of assets like stocks or homes.

Even so, the Fed's program by itself can't fix all the economy's problems, Bernanke said.

"We don't want to overpromise, the effects are ... meaningful but moderate," Bernanke said of the Fed's bond-buying program during a panel discussion after his speech. "To the extent that we can get help from the private sector, from other policies, I think that's all very constructive, so I hope that we can."

He also called on Congress to step up.

"A fiscal program that combines near-term measures to enhance growth with strong confidence-inducing steps to reduce longer-term structural (budget) deficits would be an important complement to the policies of the Federal Reserve," he said.

Bernanke has previously warned that the economy is too fragile for the Congress to slash spending or boost taxes, even as he has made the case that lawmakers and the White House must craft a credible plan to reduce trillion-dollar plus budget deficits over the long term.

But the Fed chief amplified that warning. He is doing so as Republicans in Congress — coming off big wins in the midterm elections — are using their clout to push for less government spending and more fiscal discipline.

Republicans are upset with Bernanke because they think the Fed is overstepping its bounds with the bond-buying program. They argue that the Fed is printing money to pay for the government's massive debt.

They want the Fed to focus solely on keeping inflation in check. It now has a "dual mandate" from Congress: to keep both inflation and unemployment low.

Put on the defensive, Bernanke felt compelled this week to meet privately with lawmakers on the Senate Banking Committee to defend the Fed's program. A stream of Bernanke's colleagues have also been out making public appearances to back the Fed's action in recent days. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, and Sandra Pianalto, president of the Cleveland Fed, were on the circuit Thursday.

Bernanke warned the economic risks are high if Congress doesn't work alongside the Fed to stimulate the economy.

"On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," Bernanke said. "As a society, we should find that outcome unacceptable."

Federal Reserve Chairman Ben Bernanke hit back at critics, both at home and abroad, who have challenged the central bank's $600 billion bond-purchase program.In a speech in Germany, he argued that Congress must help support the Fed's program with further stimulus aid. And...